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Goldman to Clients: Brace for Another 8% Drop in S&P

The S&P 500 is set to fall another 8 percent by the end of the year, on top of the 7 percent decline seen since the year's high reached in September, according to a new strategy note by Goldman Sachs.

Caroline Purser | Photographer's Choice | Getty Images

"Uncertainty swirling around the "fiscal cliff" that must be resolved by year end, the pending jump in capital gains taxes at the start of 2013, and the debt ceiling that will be reached in late February, represent clear and present downside risks to the market in the near term," wrote the analysts, headed by Chief U.S. Equity Strategist David Kostin.

The S&P 500 closed at 1,359.88 points on Friday, down 1.54 percent on the week. U.S. markets across the board have lost almost 5 percent since the U.S. presidential election on Nov. 6.

Kostin said the fiscal cliff — a series of tax increases and spending cuts worth $600 billion due to hit the U.S. at the start of 2013 — will ultimately be avoided, but assigned only a 55 percent likelihood to the issue being resolved by the end of this year. A solution is dependent on Democrats and Republicans in Congress and the White House reaching agreement on how debt levels should be reduced.

On Sunday, U.S. President Barack Obama expressed optimism that an agreement could be reached. "I am confident we can get our fiscal situation dealt with," he said in Bangkok, as he commenced a three-nation Southeast Asia visit.

Kostin was more bullish on the S&P 500 over the medium-term, and forecast the index would end 2013 at 1,575 points, an increase of 16 percent on current levels.

"The S&P 500 has near-term political risk but long-term policy support," he said. "Although we believe investors will have an opportunity over the near-term to buy the S&P 500 at a level below today, portfolio managers with a longer-term horizon should consider increasing equity exposure."

Kostin highlighted that the S&P 500 fell 17 percent between July 25 and Aug. 8 last year, as the U.S. debt ceiling deadline approached. He said those declines had also created an attractive entry point.

"In retrospect, the sell-off created an attractive investment opportunity, given the S&P 500 has since rallied by 21 percent," he said.

On Monday, Michael Crofton, CEO of the Philadelphia Trust Co., told CNBC's "Worldwide Exchange" that U.S. equity investors were waiting for further news on the fiscal deliberations before positioning themselves.

"I do not think we go over the fiscal cliff, but I also do not think we are very close to a solution," he said.

—By CNBC.com's Katy Barnato

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